Oil rises with tighter supply outook overshadowing vaccine woes

Oil gained the most in about a week with expectations for tighter global supply offsetting concerns that a bumpy Covid-19 vaccine rollout will further blunt demand.

Futures closed nearly 1% higher after fluctuating between gains and losses in Monday’s session. Key timespreads for both U.S. and global benchmark crude futures are in a structure indicating shrinking supplies. Iraq pledged to cut output in January and February to compensate for pumping more than its OPEC+ quota last year, and Libyan guards halted some crude exports after a pay dispute. At the same time, Russian seaborne exports of its flagship Urals grade will fall by about 20% in February.

The supply signals from OPEC+ producers “is very important for providing the belief that we’re going to see much higher prices,”said Edward Moya, senior market analyst at Oanda Corp.

Despite expectations for crude supply reductions to spur declines in global inventories, the demand outlook remains precarious as governments toughen lockdown restrictions and vaccine distribution efforts face logistical obstacles. U.S. infectious-disease chief Anthony Fauci said he’s worried about delays to the second dose of Covid-19 vaccinations as governments stretch intervals to speed immunizations. Meanwhile, U.S. lawmakers still have yet to agree on an additional fiscal stimulus package, which could provide a boost to oil demand.

“People are worried about the pandemic and potentially risks associated with fiscal stimulus,” said Bart Melek, head of global commodity strategy at TD Securities. “Increasingly, we’re hesitant to say that Biden’s going to pass a $1.9 trillion expenditure plan. Clearly, that doesn’t bode well for getting unusually strong demand for oil.”

Oil prices will likely face a “slow grind higher” rather than a sharp jump in the near term as physical oil markets in the Atlantic Basin are softer than last month, RBC analysts including Michael Tran and Helima Croft wrote in a report.

“The physical market appears to be absorbing any material demand softness from lockdowns in stride, for now,” the report said. “However, the physical market is far from tight and additional barrels are not being bid in size, even as the Saudi cut propagates to the consumer base for next month.”

Supply curtailments are strengthening the market’s structure, with Iraq set to pump 3.6 million barrels a day in January and February, the lowest level since early 2015. Brent’s prompt timespread was 20 cents a barrel in backwardation—a bullish market formation where near-dated contracts are more expensive than later-dated ones. That’s the strongest the spread has been since February. WTI’s prompt spread is at the strongest since May.